Even with multiple expected Fed rate cuts, mortgage rates may not fall significantly. They are not directly tied to the Fed funds rate, and other factors are needed to bring them down enough to improve housing affordability.
Homeownership is the primary vehicle for intergenerational wealth creation in the United States. The average household has four times more wealth tied up in their home than in stock market investments, highlighting the severe economic impact of declining ownership rates.
A sustainable recovery in housing activity requires a roughly 10% improvement in affordability. Morgan Stanley calculates this threshold will be met when mortgage rates fall to approximately 5.5%, a specific target needed to meaningfully "unstick" the market from its current low-activity state.
Despite the current affordability crisis, underlying demographic trends from young millennials and Gen Z create a massive, long-term structural demand for housing. This will require approximately 18 million new units through 2030, irrespective of short-term market cycles.
The 2008-2010 first-time homebuyer tax credit serves as a cautionary tale. While it caused a temporary rise in sales, it primarily pulled demand forward. The housing market hit its post-crisis lows only after the program expired, suggesting such policies don't fix underlying problems.